Q4 2021 Merit Medical Systems Inc Earnings Call

February 24, 2022

Good afternoon, ladies and gentlemen, and welcome to the fourth quarter and fiscal year 2021 earnings Conference call for Merit Medical Systems, Inc. At this time, all participants have been placed on them.

And only mode. Please note that this conference call is being recorded and the recording will be available on the company's website for replay shortly.

I would now like to turn the call over to Mr. Fred <unk> properly.

<unk> Medical Systems' founder Chairman and Chief Executive Officer. Please go ahead Sir.

Thank you and welcome everyone to Merit Medical's fourth quarter and fiscal year 'twenty, One earnings conference call.

Im joined today on the call by Raul Parra, our Chief Financial Officer, and Treasurer, and Brian Lloyd, Our Chief legal officer and corporate Secretary.

Ryan would you please take us through the Safe Harbor statements. Thanks, Brad.

Before we start I would like to remind everyone that this presentation contains forward looking statements that receive safe Harbor protection under federal Securities laws.

Although we believe these forward looking statements are based upon reasonable assumptions they are subject to unknown risks and uncertainties.

Realization of any of these risks or uncertainties.

As well as extraordinary events or transactions impacting our company could cause actual results to differ materially from those currently anticipated.

In addition, any forward looking statements represent our views as of today February 24, 2000, 2022, only and should not be relied upon as representing our views as of any other date.

We specifically disclaim any obligation to update such statements, except as required by applicable law.

Please refer to the section entitled cautionary statement regarding forward looking statements in today's presentation for important information regarding such statements.

Please also refer to our most recent filings with the SEC for a discussion of factors that could cause actual results to differ from these forward looking statements.

Our financial statements are prepared in accordance with accounting principles, which are generally accepted in the United States.

However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period over period over period comparisons of such operations.

This presentation also contains certain non-GAAP financial measures.

Reconciliation of non-GAAP financial measures to the most directly comparable U S. GAAP measures is included in today's press release and presentation furnished to the SEC under form 8-K.

Please refer to the section of our presentation entitled non-GAAP financial measures for important information regarding non-GAAP financial measures discussed on this call.

Readers should consider our non-GAAP financial measures in addition to.

Not as a substitute for financial reporting measures prepared in accordance with GAAP.

Please note that these calculations may not be comparable with similarly titled measures of other companies.

Both today's press release and our presentation are available on the investors page of our website.

I will now turn the call back to Fred Thank you Brian let.

Let me start with a brief agenda of what we will cover during our prepared remarks, I will start with an overview of our better than expected revenue and financial results for the fourth quarter.

And 2021 fiscal year.

After my opening remarks, Raul will provide you with a more in depth review of our quarterly financial results and the formal financial guidance for 2022 that we introduced in this afternoon's press release as well as a summary of our balance sheet and financial condition. We will then open the call for your questions.

Beginning with a review of our fourth quarter revenue performance, we reported total GAAP revenue of $278 5 million in the fourth quarter up seven 9% year over year.

Total GAAP revenue growth was driven by six 4% growth in U S sales and a 10% growth in international sales.

Excluding the headwind to our GAAP revenue growth as a result of changes in exchange rates compared to the prior year period. Our total revenue increased eight 4% year over year in the fourth quarter on an organic constant currency basis.

Our total constant currency growth was primarily driven by a $6 six increase in U S sales and a 10 eight increase in international sales.

Our fourth quarter revenue exceeded the updated guidance, we discussed in our Q3 call and and implied fourth quarter constant currency revenue would increase in the range of approximately 2% to 6% year over year.

The strong revenue results in quarter, four was driven by solid execution from our team.

Stronger than anticipated demand from OEM customers.

And more favorable sales trends in China versus what our updated guidance range had assumed.

To a more detailed review of our revenue results in quarter. Four note unless otherwise stated all growth rates are on a year over year and constant currency basis.

In terms of our sales performance by our primary reportable product categories fourth quarter total revenue growth was driven primarily by 9% growth in sales of cardiovascular products.

And 4% growth in sales of endoscopy products compared to the prior year period.

Sales of our peripheral interventional products increased by 11% year over year, representing approximately half of the total cardiovascular segment growth year over year sale.

Sales of our drainage and envelope therapy products, which together represented roughly one third of our total pie business increased 9% year over year in Q4, and together with the largest contributor to total pie growth in the quarter.

Sales of our scout radar localization products increased 14% year over year in quarter, four and sales of our biopsy products increased 23% year.

Year over year in the fourth quarter.

Sales of our cardiac intervention products increased 12%.

Year over year, representing the second largest contributor to total cardiovascular segment growth year over year sales of our intervention products were the largest drivers of drivers of the Ci product road category, increasing 12% year over year fueled by growth of our basics and map lines, which increased 18 and <unk>.

<unk> percent, respectively in quarter four.

Sales of our and geography products also contributed meaningfully to our total Ci product category growth, increasing 18% year over year in quarter four driven by driven by continued strong demand for our diagnostic guide wires and cardiology diagnostic catheters.

Sales of our OEM products, which much stronger than expected in Q4, increasing 16% year over year, driven by improving demand from large customers replenishing inventory levels in multiple categories, including kit EP CRM and fluid management products.

Our total cardiovascular sales growth was offset partially by a 5% decrease year over year in sales of our Cps products. However, the stable demand trends in this area of our cardiovascular business was matched by a $4 million net headwind from the sale of the culture.

Year over year sales prior year sales also included $2 $5 million of sales from our <unk> business, which did not contribute to sales in the fourth quarter of 2021, given the divesture exclude.

Excluding culture and <unk> sales of our Cps product category increased 4% excuse me, 8% in quarter four.

Finally sales in our Endoscopy segment increased 4% in quarter, four driven primarily by a 27% increase in sales of our <unk> line as we remedied the supply chain interruption that impacted sales in the third quarter of 2021.

Now turning to a brief summary of sales performance on a geographic basis.

As I mentioned, our fourth quarter sales in the U S increased six 6% year over year and our international sales increased 10, 8% year over year, both on a constant currency basis.

Yes.

Sales to U S customers represented 45% of our total growth in quarter four led by our U S direct business, which increased approximately mid single digits year over year.

Elective procedures were steady during quarter four until Covid cases.

<unk> counts began to surge during the back half of December as the Omnicom variant took hold in the U S.

At that time numerous hospital systems began announcing moratoriums on nonregent procedures that could require an overnight stay in some cases for up to 30 days.

Directly related and according to data from the Department of Health and Human services, Utah excuse me U S hospitals, we're reporting critical staffing shortages. The most since late December of 2020.

Additionally, tighter restrictions on sales incremental access and large part mirrored the surge in case counts and hospitalizations during December .

Sales in the three global regions, APAC, EMEA and rest of the world increased approximately 714% and 14% respectively on a constant currency in the fourth quarter.

Similar to the O U S trends, we have discussed on earnings calls throughout 2021, we continue to see notable notable variation in the pace of recovery across regions of the world, where we do business, including wide variation within certain geographic regions.

The EMEA region was choppy in quarter four as the region continues to see material impacts from COVID-19, specifically in terms of access restrictions, which depending on the country were limited as much as 60% to 70%.

That said elective procedures continue to ramp back up although we are not back to pre COVID-19 levels. We.

We are managing our EMEA business, well overall and are leveraging virtual selling strategies as much as possible, which is helping us to drive the business forward. Despite the challenging operating environment.

The EMEA region was the largest contributor to total international revenue growth in quarter four with a strongest sales results of the EMEA business coming from Russia, United Kingdom, Other EMEA, Italy and France.

APAC sales increased 7% in quarter four although excluding the impact of the Divesture of the <unk> business sales increased 12% year over year sales in China increased 13% year over year in the fourth quarter.

As mentioned earlier these results were far better than we contemplating in our quarter three call.

When we foresaw a flattish sales year over year.

The better than expected sales results in China in the fourth quarter was.

It was driven by demand for our inflation devices in advance of the volume based purchasing tenders that we currently expect to begin in April of this year.

In summary.

So we're proud that we're able to deliver results above the high end of our guidance range. Despite the tougher than anticipated operating environment in quarter four.

Now before turning the call over to Raul I wanted to comment on a few other noteworthy items in the in the quarter first.

We delivered another quarter of impressive profitability improvement margin expansion and free cash flow generation in quarter four our non-GAAP gross profit in our non-GAAP net income reflects strong leverage in the period, increasing 13, and 33% respectively compared to the prior year.

Our non-GAAP gross margin increased 210 basis points year over year to 50% of.

A record for us and we manage our expenses prudently, which resulted in a non-GAAP operating margin of 17, 4%.

So a record for US we also generated more than $37 million with free cash flow in the quarter.

Finally.

I wanted to provide a brief update on our foundations for growth program.

Pacifically we've made considerable.

Progress in year, one of the program and we believe our efforts to date and have added a transformative impact on our company.

We have launched more than 40 initiatives intended to drive value creation for shareholders across many areas, including SKU optimization network consolidation compensation and benefits benefits and of course product line transfers and manufacturing initiatives. We have discussed on prior calls.

The FFG program is helping to offset the inflationary cost pressures, we're seeing in certain raw materials and shipping and freight expenses.

Our focus on scrap reduction across manufacturing site has resulted in more than a 20% reduction in scrap as a percent of our total production.

We are also seeing the early benefits of improving our manufacturing efficiency specific in the area of SKU rationalization, we identified more than 2000 products that were targeted for obsolescence, given low revenue and our low product gross margins we.

We have already inactivate it 95% of these products with customers and nearly all cases.

We've been able to move them to alternative products.

That foundation for growth program is also form six new teams.

Including control tower pricing global procurement global HR, EAM strategic account management and in EAM a inside sales team. We have also defined and recruited more than 15, new roles, including a chief Human Resource Officer Chief.

Chief strategy, and innovation Officer, Vice President of Global pricing, Vice President of Global Communications, and Vice President Global head of talent, and a vice president of global comp and benefits.

Overall, we continue to execute on our <unk> initiatives and are excited about the progress in year one.

And the results we're seeing.

We are seeing across our entire business.

Finally, we believe our financial results in fiscal 2020 represent clear evidence that we're making progress towards our goal of enhancing merits long term growth and profitability profile we.

We increased our current constant currency revenue more than 10% year over year, we expanded our non-GAAP gross margin 220 basis points year over year, despite considerable headwinds in our cost of goods line compared to last year.

We increased our non-GAAP operating margin 230 basis points year over year, and most importantly, we have generated more than $119 million of free cash flow in fiscal year 2021.

We remain committed to financial targets, we outlined in the foundations for both program for the three year period, ending December 31, 2023, which call for our constant currency organic revenue to increase at a CAGR of at least 5% non-GAAP operating margins of at least 18% and cumulative free.

Cash flow generating more than $300 million.

Now with that said, let me turn the time over to Raul will take you through a more detailed review of our fourth quarter financial results and our 2022 financial guidance, which we introduced in the <unk>.

Press release this afternoon.

Raul.

Thank you Fred.

Given Fred's detailed review of our revenue results I will begin with a review of our financial performance across the rest of the P&L.

For the avoidance of doubt unless otherwise noted my commentary will focus on the Companys non-GAAP results during the fourth quarter of fiscal year 2021.

We have included reconciliations from our GAAP reported results to the related non-GAAP items in our press release and presentation are available on our website.

Gross profit increased approximately 13% year over year in the fourth quarter, our gross margin for the fourth quarter was 50% compared to 47, 9%.

In the prior year period, the approximate 210 basis point increase in gross margin year over year was primarily due to changes in product mix improvements and manufacturing efficiencies on higher volume offset partially by inflationary headwinds we are seeing in logistics labor and to a lesser extent in raw materials specifically.

<unk>, we estimate the year over year increase in logistics and labor expense.

Represented a headwind to our non-GAAP gross margins of more than 300 basis points in the fourth quarter.

Fourth quarter operating expenses increased 9% compared to the fourth quarter of 2020, the year over year increase was driven by a 28% increase in R&D expense and a 5% increase in SG&A expense compared to the prior year period.

The increase in R&D expense in Q4 was driven by the combination of the lower spend in the prior year period related to COVID-19.

Outside expense for certain.

R&D projects in particular related to Rhapsody clinical study and increased compensation expense related to our acquisition of Cayenne medical and two other new projects the.

The increase in SG&A expense was primarily due to.

Higher selling expense, including commissions and bonus expense on the increase in sales year over year.

Mitigated by our continued focus on managing expenses, which provided effective.

Proved effective again this quarter as we were able to reduce G&A only expenses, 4% year over year.

Total operating income in the fourth quarter increased $8 million or 19% year over year to $48 4 million.

Our operating margin for Q4 was 17, 4% compared to 15, 7% in the prior year period.

Fourth quarter other expense net was $1 6 million compared to $2 $6 million last year.

And other expense net was driven by lower interest expense as a result of a lower effective interest rate and lower average debt balance.

Fourth quarter net income was $40 8 million or <unk> 71 per share compared to 38.

$8 million or <unk> 54 per share in the prior year period.

We are very pleased with our profitability performance in the fourth quarter, where we reported growth in net income and diluted earnings per share of <unk> 33.

And 31% respectively year over year.

Turning to a review of our balance sheet and financial condition as of December 31, 2021, our strong profitability performance in the fourth quarter of 2021 combined with strong working capital efficiency resulted in strong free cash flow generation of $37 5 million in the fourth quarter, we generated more.

$119 million of free cash flow for the 12 months ended December 31 2021.

We used a portion of this free cash flow to reduce our outstanding borrowings specifically, we paid down approximately $108 $5 million of debt on our line of credit facility during 2021, including $35 9 million, which we paid down in the fourth quarter.

As of December 31, 2021, we had approximately cash on we had cash on hand of $67 million long term debt obligations of approximately $243 million and approximately 490 <unk>.

Of available borrowing capacity compared to cash on hand of $56 9 million long term debt obligations of approximately $352 million and available borrowing capacity of approximately $389 million as of December 31, 2020, our net leverage ratio as of December 31 was <unk> nine times on an adjusted basis.

Turning to a review of our fiscal year 2022 financial guidance, which we introduced in this afternoon's press release for the 12 months ended December 31, 2022, the company expects.

GAAP net revenue growth of approximately 4% to 6% year over year. The GAAP net revenue range assumes a headwind from changes in foreign currency exchange rates in the range of approximately $3 million to $3 5 million, representing a headwind of approximately 30 basis points to our forecasted GAAP growth rates for this year.

The GAAP net revenue guidance range also assumes net revenue from the cardiovascular segment.

Growth of approximately 4% to 6% net revenue from endoscopy segment growth of approximately 6% to 8% year over year.

With respect to profitability guidance for 2022, we expect GAAP net income in the range of $75 4 million to $84 million or $1 30 to $1 45 per diluted share.

non-GAAP net income in the range of low <unk>.

<unk> hundred $40 million to $148 7 million or $2 41.

$2.56 per diluted share.

For modeling purposes, our fiscal year 2022 financial guidance assumes non-GAAP gross margins in the range of approximately 51 to <unk> 56 compared to $49 three in fiscal year 2021.

non-GAAP operating margin in the range of approximately 16, 6% to $17 three compared to 16% in fiscal year 2021.

non-GAAP other expenses of approximately $6 million.

non-GAAP tax rate of approximately 22% and diluted shares outstanding of approximately $58 million.

Lastly, given the COVID-19 related headwinds that impacted our first quarter of 2021 revenue results, where sales increased just 2% year over year, our guidance assumes growth in the first quarter of 2022 that is modestly higher than the growth ranges.

Over our full year guidance assumes specifically, we expect our total revenue to increase approximately 5% to 5% year.

Year over year on a GAAP basis, and increase approximately 6% to 8% year over year on a constant currency basis in Q1 2022.

Note our growth expectations for Q1, 'twenty to assume no material improvements in the COVID-19 related headwinds on the elective procedures, we experienced in Q4 dollars 21.

We expect our non-GAAP net income and EPS to decline approximately 8% to 16% year over year in Q1, driven by inflation related pressures on our year over year gross margin performance and a 10% year over year increase in non-GAAP operating expenses against an easier prior year comparison.

With that I'll turn the call back to Fred.

Hello.

In closing despite the challenging operating environment in quarter. Four we are proud that we were able to deliver revenue results that exceeded our guidance.

We also note that this was a consistent theme in our quarterly results throughout fiscal year 2021.

Quarter. Four also represented another quarter of impressive profitability improvement margin expansion and free cash flow generation.

Again consistent themes on our quarterly results throughout the fiscal year 2021.

We're confident in our 2022 guidance, which calls for total revenue growth on a constant currency basis up 4% to 6% year over year, and we expect to see progressive improvement in the operating environment, specifically access to patients and electric procedures over the first half of 2022.

We also continue to expect to report improving non-GAAP gross operating margins and strong free cash flow in 2022, driven by strong execution and contributions from our multi year strategic initiatives related to the foundations for growth program.

The benefits of our FFG program are helping us to navigate the inflationary environment.

Well and while we have avoided material business impacts related to the global supply chain disruptions to date. This is something we are watching closely as more and more companies are struggling in this area.

We are executing well and delivering strong performance. Despite the challenges 2021 achievements reflect our team's ability to remain focused on our strategic initiatives, while standing ready to adapt quickly to changes in our markets.

We would like to thank all of you and all of our team members around the world who made this possible.

Now that wraps up our prepared remarks, and we would now like to turn the time back over to our administrator and open up the line for questions.

Thank you, Sir ladies and gentlemen, if you'd like to ask a question. Please signal by pressing one on your telephone keypad.

Using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.

We do ask that you limit yourself to one question and one follow up.

If you would like to ask additional questions. We invite you to add yourself for the queue again My question Star one.

Our first question coming from the line of Jason Bednar with Piper Sandler Your line is open.

Hi, guys. This is drew on for Jason and thank you for taking the questions and congrats on a.

Nice to enter the year here.

Thanks, Josh I wanted yes.

Yes drew.

I said, Jason anyway, sorry.

[laughter].

No problem.

I wanted to start off on the guidance a little bit here.

Just given the macro environment we've had.

Some med tech companies willing to quantify the level of headwinds that they are assuming.

Into their guidance from supply chain inflation.

Made some comments on FX.

So just wondering if that's something you'd be willing to do and then what is your guidance assuming as far as when you might return to a more normalized operating environment.

I'm going to let Rob will answer that Raul.

Yes.

So I think from a getting back to normal I think we've been very consistent in our messaging right I think we kind of.

Have all along been just talking about a kind of a choppy recovery to normal.

A longer period of time with the most right now V shaped recovery.

I think we're obviously well into this we really think we start to get back to a normalized level kind of the back half.

This year.

As far as the inflationary.

Yes.

<unk> that we see in our 2022 guidance.

We expect somewhere around 120 basis points in our gross margins that's impacting.

The.

The basically headwind for 2022, that's built into our guidance.

Does that help you.

Yes, that's very helpful. Thank you.

And then just your comments on China being better than expected can you maybe flesh out a little bit how sustainable is that higher than expected demand in.

Whats the right way to think about.

The incremental gains you might get some new product registration there and then the offset being the anticipated headwinds from pricing and can you just remind us on the peripheral side.

Are those products already cleared the sell in China, or the cadence of new launch activity going to pick up throughout the year.

Thank you well, yes, we have a kind of a constant.

<unk>.

Hi.

Effort in terms of new products that get approved whether they be wires.

They'd be split of both sheets and so on so forth. So.

When they get approved and how they get approved is really up to the government and whether it be in the U S or in China.

In many many ways unpredictable, but last year, we got the Swift Ninja approved and then they have to get on the pricing counsels so to speak so.

We just keep moving along with those products and it's kind of a constant cadence.

We currently expect.

That.

Well, we know that some of this pricing is coming on.

For the volume pace pricing in April .

Now all of that being said.

As you know last year, we spent a lot of time with.

With much Ado about nothing.

We talk to and people would ask questions about China is it all turned out it was a non event. We do know that these events are coming on.

How they peel in what the competitors do supply chain issues Theres. So many things that can affect and it's really only for a couple of product. Our strategy has been to move as we've said in previous calls to move inward to 30 cities that have over 5 million people and continue.

To invest and grow in China.

Do you want to add anything to that the only thing I would add is that we remain confident in our long term growth expectations for China.

I mean, we did for 2021, we grew at 15% on a constant currency basis. So.

Nothing more that I hope that helps.

It does thank you.

And our next question coming from the line of <unk>.

<unk> with Wells Fargo. Your line is open.

Good afternoon, guys. Thanks for taking the question and congrats on a nice quarter, Brad might be doing better.

I am yes.

A lot better that was like yes.

Couple of months ago, Larry come on now.

Okay.

I know.

Great.

Debt to EBITDA at <unk> nine times, it's pretty low for you guys you've been pretty quiet on the M&A front valuations.

Valuations have come down.

Could you just kind of update us on your thoughts on kind of M&A do you think it would be more active this year.

Some of the criteria.

For deals.

I had one follow up yes.

One thing I will say.

Larry is how pleased we are with the free cash flow that we've generated over the last couple of years on our foundation for growth plan.

I think that.

Valuations are coming down.

And.

And we're out there looking and we are in a very very good position as you pointed out.

But at the same time I think we showed substantial discipline.

Last year.

And looking at making sure that we didn't make.

Mistakes.

The real issue and the best way for me to answer the last part of your question is we're committed as you have seen and as we will continue to shell and our foundation for growth. So anything we do is going to be have to be consistent or exceed those expectations or we're just not going to do it.

So.

We think this works well, it's got everybody enthused here.

We've been able to put a lot of plans in place for our employees and pay for them.

Larry without looking.

There are some opportunities and when they meet the right criteria then.

Hopefully participate in those but we're not going to chase and we're not going to depart from our.

Our program that all being said you're right we've never been in a better position, we've been able to pay for all of the things in the past.

We'll be out of debt here and this thing will continue in the meantime, we'll pay down debt, but we are out here.

Looking for the right things that help the strategy not just anything roll.

I can't add anything to that I think we've been very focused Larry and obviously.

We're committed to the FFG and I guess that.

That's really what when we look at acquisitions of M&A targets.

That's the focus right.

Definitely a discussion point.

And it's one of the hurdles that that target has to kind of overcome.

I hope that helps.

Very much and one for Ralph.

When you talked about the.

<unk> for growth targets, you only mentioned.

The low end, so like 18% for operating margin is that was that deliberate obviously theres a range of 18 to 21 are you pointing people more to the low end.

This year the gross margin target is that because inflation has just made that more challenging. Thanks.

Thanks for taking the questions.

Yes, well first look.

Think.

We've been very consistent in our messaging right I think we reaffirmed our <unk> goal.

On the call and we've been very consistent from day one right.

We are committed to delivering at least 18% on a non-GAAP operating margin, Larry and I would say that that.

No.

Based on what we've done this year based on the guidance that we have this year I think people can can kind of look at where we're at and feel good about those targets and we feel confident.

I guess I would just say that we've consistently said look we.

We've talked a lot about the 18.

Targeted 18 to 21, we're fully aware of that and we're committed to the FFT FFT target and.

Reiterate what he said and for everybody here, Larry we are committed to that 18%. We are committed to the foundations for growth it's working.

A lot of work to be done and.

We're going to stay on this track because we think it's the right track to be able to.

Provide and increase shareholder value, so that's where it anything finally.

I would just say look I think if you look at the at the performance.

We had this last year.

Look at our guidance for 2022.

Thank you.

We'll talk about what 23 brings in.

How we finish off that year, when we get there, but again, we're feeling confident in what we've done and what we're going to do this year still a lot of wood to chop to.

Got it thanks, so much guys.

You bet. Thank you Larry good to hear from you.

And our next question coming from the line of Mike Matson with Needham. Your line is now open.

Yes. Thanks.

So.

If I heard you correctly on the comments on China and the tenders I think you said something along the lines that you saw more demand for the balloon and flavors ahead of <unk>.

The tenders I mean, it seems a little bit opposite from what we've heard from some of the other companies, where they've actually seen people kind of deferring quarters, because the prices are going to typically go download the tender. So I just wanted to ask about that.

Yes, it's a good question.

Does that pent up demand.

Been there long time, where the quality player we're the market leader.

They are all of those things that play into this Mike.

As we were talking about this.

You might see exactly what you.

What you stated and what others have seen we simply did not.

And.

Thats all I mean the numbers.

I mean, we expected it right.

I mean, we had talked about it.

Kind of expected what everybody else saw.

And just to know that this didn't happen, which is good for us.

Okay. So is less of an issue of actually benefiting than just not having a.

Negative impact from that.

I would just say that I am trying to.

Im sorry.

Don't worry about it.

Okay.

Sorry, no no.

So.

And then the adopt skippy business.

It's very small relative to your other categories.

Is that whats the plan there I mean is that something that you plan to get bigger maybe acquire things are.

Growth organically with new products or something that you've developed internally or is that something you could potentially divest.

It just seems to be very small.

Yes.

Our category.

And is there any kind of synergies with that business in the other categories that you're in.

Well.

Okay. So you are correct.

It is one of the areas that we're really focusing on for scale.

So we have been looking for some time.

The other the other part of it is that we are.

We do our inflation devices.

Theyre larger that are used for there is something that is in our core business, but it's a unique product and a very successful one for us and we do have ongoing research and development.

New products.

That are complementary and.

New areas.

Outstanding and their staff and the other in that area in our wheelhouse and our technology base. So.

Youre right, we need more scale there.

In terms of divesting it we don't see any reason to consider that.

We're concentrating on how to build that business.

Okay got it thank you.

Thank you Mike.

And our next question coming from the line of Jayson Bedford with Raymond James Your line is open.

Good afternoon.

Thanks for taking the questions and congrats on the progress you guys showed some nice improvement this year.

Sure.

A few questions here and I don't really want to go down this rabbit hole, but just with the China tenders.

First I guess do we know for sure that the tender will occur in April and then kind of second can we assume that this is factored into the 4% to 6% constant currency.

Well I mean.

Our expectation is that they're going to happen and it is built into our guidance.

We expect it to start in April but again.

As you know.

Yes.

No.

It comes and goes I mean, I guess there is just its just not consistent right. We understand it's coming we're seeing it happen <unk> seen that happen with Stan you've seen it happen with with the large joint.

Youre seeing some of the I guess really.

<unk> trauma tenders are happening.

It's definitely happening it's just the attempt that we're up to at the Mercy of of the Chinese government to be honest with you and the provinces right.

So that have their own and it ask it on the price list. That's what we were told.

Again, I want to go back to what I said previously and that is you have to remember that the range of products. The fact that we have hemostasis valves and other things that go along with that.

Yeah.

And that with the market later so.

We've seen these programs, but I think going back to that and consistent it's not merit thats inconsistent it may sound like it.

Yes.

There is information that we get from the field about what they think is going to happen and we went down as you said the rabbit hole. We spent a lot of time last year on nothing at all so.

But.

In terms of the 2020 guidance it assumes that the China growth will be a material driver.

Of growth that we expect but it's the whole APAC region. So what we're starting to see as prices come back to life last year, you'll recall that it was the slower part of it so we improved and that whole area and we're really quite excited about the whole APAC region.

Just want to throw that in as well.

Okay. That's helpful.

I apologize if I missed this earlier, but what's left in terms of kind of big Ole it's tied to the foundations for growth program.

Well. These are programs that you started out with three years.

You implement and I will just take like any program.

We made considerable progress.

We think it's the added transformative I mean, just look at it last year.

What we did with gross margin, we've launched more than 40 initiatives.

Our SKU optimization network consolidation compensation and benefits to make sure. We can keep the people we have and incentivize them. In addition to the product lines.

Manufacturing issues that we've done to Mexico. So it's an ongoing process theres more transfers theres more SKU optimization, but like anything when you start digging a hole the first part of the <unk> relatively easy, but when you start getting to the other steps a little bit tougher, but we're just committed to it and Jason as I think we've talked.

Many times, we're believers where importantly.

All of our employees are believers.

Because they've all been rewarded or hit their bonuses are hit their goals. This year and success breeds success. So we want to we've had a lot today, we'll continue to say it of our commitment to finishing what we said we were going to do let me go through it again, 5% to 7%.

Operating margins of 18% to 21% and over three at $300 and free cash flow over that three year period and that's another important issue just clarify for everybody that it's not a one year program.

Three year program and.

And we're doing everything we can to meet or exceed those goals.

I'm going to take advantage and just highlight some of the things that we did in 2021.

We're really proud of.

Our employees in the.

The company for really kind of what we've been able to see you.

We're seeing it.

The FFT.

Ft program is helping us out some of the inflationary cost pressures.

Material shipping and freight.

Our focus on scrap reduction across manufacturing sites as a result more than 70%.

We're also seeing some of the early benefits.

Improving our manufacturing.

Specifically, the SKU rationalization, we got rid of almost 2000 products.

Gross margin or no revenue.

About 95% of those have been inactivated but.

Nearly all cases moving to alternative products.

In addition, we've got new programs that were that were doing.

<unk>.

Investments that we've made I'll say from an organizational standpoint, we've got the control tower.

Pricing.

Global procurement globally Char.

Strategic accounts, while all sorts of and to come back to the original question Theres a lot of work that needs to be done.

But we show what we proved to ourselves and I think our shareholders too.

So our analysts to everybody that's involved in the company.

What it can mean theres a lot of work to be done I think the language that all users. All users is there still a lot of wood to chop.

Chocolate more.

We'll get the trees down and chop it up and we'll be ready to go and we'll continue on this pathway.

Okay Fair.

Fair enough.

Last one for me.

Mentioned that logistics and labor.

I think a 300 basis point impact on what was a very strong gross margin number in the fourth quarter.

Yes.

<unk> costs are here to stay but what about the logistics headwinds when do they when do you think they start to abate yes.

Yes, well, if I can really answer that with any.

Accuracy.

I think the thing that we brought I'll answer it this way we've never been in a rush to set dates and do things.

There are always wrong.

We think that they will we will adjust to them and adapt them as they start to come along or find other methods.

We've been doing all the time, so let me just say we have.

Full time logistic people with a lot of experience here that it worked for other big companies and I have no idea, we have hopes and.

And that sort of thing but.

I mean, who thought we would be where we were last night and the things that happened how does that affect what does it do sell.

It's a hard.

I can't give you a date I would just say that we're working toward and we're aware it's out there and we're doing everything we can to be aware of the circumstances and adapt.

To the marketplace and what's out there all the time Jason.

Tough question, but that's the best way I can answer is and that is we don't know, but we will work to adapt to whatever the conditions are in the best way you can roll, yes, specifically around freight we think we can control some things one of the things that we've done is we know we're going to allow us.

Troops to build more inventory to allow for additional capacity and time on.

During the shipping lanes, so we've got.

Things that we can control that we're going to try and control to help mitigate some of that some of that expense but.

Yes, I think Fred to hit.

Mostly at the end of the day on that as to meet customer needs and do it better than anybody else and Thats part of our FFG, Yes, we're there to be the best in the business and I think we've I am proud of what we accomplished last year and.

You all know about the big mall or Big Mall has to start and I think it started we just have got to have two more years to go and then we'll start talking about where we go from there we're already thinking about that now.

Just saying.

We're on it.

Jason as best as we can be.

Okay, great. Thank you guys alright, thats good to hear from you Jason Thank you.

And our next question coming from the line of Jim Sidoti of Sidoti <unk> Company. Your line is open.

Hey, Jim.

Hey, good afternoon, thanks for taking the questions.

You called out Rhapsody is one of the reasons why.

R&D went up in the quarter. So can you just give us an update on how that trial is going and should we expect R&D to be around this level over the next few quarters.

I would say generally.

Yes, we wanted to spend as much as we can still be within the parameters that we have.

We have dedicated.

Sure.

We've made a lot of progress in the fourth quarter. There were 40 sites that were activated the pace of.

Enrollment has increased year to date and we're targeting the completion of the trial by the end of 2023.

So I think we've made a lot of progress there was a little slow to start out with because of sites in clinical people that have to be they are not our people, but there are people to be able to staff to be able to record the results, but Jim I think we've made a lot of progress in this and particularly.

Particularly recently, we are starting to see acceleration now.

Okay, and then as far as the expense level.

About right for the next couple of quarters.

Well I think.

We've called out our guidance, we did give some color around Q1.

Jim and I think we'll leave it at that.

Okay in other words.

It's in our numbers yet.

Got it.

And.

Anything you can say about what's going on with Russia, right now I know that was an area.

You had some growth in 2021.

Can you can you give us some sense on what they are.

Yes.

And there yes, so it's really interesting to watch whats been going on in the market today, but.

First of all our business in Russia, and Ukraine was not material to our 2021 revenue and importantly, Russia and Ukraine does not represent a key growth driver in our plan for 2022.

So.

It's just not an import I don't want to say, it's not important but it is not material.

Got it okay, obviously watching the developments in the region.

As things unfold in real time.

We're keeping an eye on things.

But.

No.

Just not material.

Alright, and then $120 million of free cash flow.

Another great year there.

Would you ever consider share buyback.

Well listen.

Its interesting question and one we've we've talked about but I think we we have this debt interest rates.

Our increasingly want to pay that off and we want to take a look at opportunities and we have a very strong balance sheet. So I think we will.

Rather than committing ourselves to we will do this or do that is just stay on the program Moron look for the opportunities that we've discussed on this call today, we are working.

We were very disciplined and last year, we didn't chase anything we didn't get crazy and we don't intend to on the other hand.

There are a lot of things that start to play into better values.

Valuations and then I think that's the kind of thing that we've been waiting for and we're seeing opportunities pop up.

Yes look I think we expect to generate strong free cash flow again in 2022.

I think about $75 million is a good targeted things to think about for modeling purposes.

It's important to consider that we have some planned investments related to FFG.

That are going to drive our capex to the $55 million to $60 million range for the full year of 2022.

Additionally, our free cash flow guidance assumes that kind of an uptick in working capital.

And that's really two things that I want everybody to kind of think about we will have a kind of a higher cash pay.

Payment related to taxes that we've accounted for.

And Additionally, one of the key items that we talked about earlier is the continued and proactive investments in our inventory balances as part of our strategy our strategy to build the required safety stock just to make sure that we can meet our customer demands and needs I think our supply chain has been a big factor for us and it's.

Its vertical integration has really helped us out and we want to make sure that we have the right inventory levels to be able to.

Take advantage of any customer names.

Alright, thank you.

Alright. Thank you good to hear from you.

Ladies and gentlemen to ask a question. Please press star one.

Our next question coming from the line of.

<unk> <unk> with Canaccord. Your line is now open.

Thanks, Mike Hey, How're you doing my questions have been answered thanks.

Thank you Bill.

And our next question coming from the line of Steve Lichtman with Oppenheimer. Your line is open.

Hi, Steve Thank you Hi, guys Hey.

Just a couple of quick modeling questions one.

<unk> is the tax rate guidance assume any stock based compensation.

And how much.

How much did that benefit you guys in.

In 'twenty, one on the tax rate.

Yes.

No.

Our tax rate just to kind of I think thank you for the question because I wanted to kind of address this because we did have a pretty low tax rate last year.

At 18% on a non-GAAP basis, so the higher tax rate is assumed in our guidance as you mentioned at 22% I will call out that kind of our base rate on a non-GAAP basis.

Is around 23, and a half just to make sure people understand and so we've built in some benefits for.

Or exercise of stock options this year.

We usually way that towards the back half of the year just as a.

For modeling purposes.

And that's really kind of I guess the color behind it is we've assumed that kind of our base rate and some benefits as stock options.

Obviously, we hope for those to come in the back half of the year.

Got it okay. Thanks for oil and then just secondly on the cadence for the year I'm just trying to.

Not that I think that through to the first quarter on the top line you are saying will be above average because of the comp, but what drives the I guess the.

The greater pressure on the bottom line in the first quarter versus the rest of the year can you walk through that a little bit.

Yes, so we did call out an 8% to 16%.

Decline in the quarter a lot of it is around the Cogs inflation pressures that we're seeing in addition to if you remember we shut down during the December holiday period, and then it takes us time to ramp back up in the first quarter. So there is a combination of those two with the inflationary pressures that we're seeing plus just.

The normal cadence in our manufacturing process.

Got it so it's really on the Cogs side that will be a little bit elevated in earlier in <unk>.

Okay, and then a little bit of operating expense to rate just because there.

There is more and more access from our from our people getting out and of course.

What comes from that we hope will be increased revenue Denton road. So.

There's a bit more expense than we had last year.

Okay Alright.

Alright, thanks, guys.

Great. Thank you.

Yes.

I'm not showing any further questions at this time I would now like to turn conference back to Mr. Fred Lynch for any closing remarks.

Well again, thank you very much for joining us again.

Wanted to let you know that.

How pleased we are with our performance last year.

We think that creates great momentum for the business our commitment to the foundations for growth.

And the track that we've been on.

It's something we're going to stick to.

While we are looking at other opportunities.

<unk> and continuing to stick with our research and development in our core products. So those are important issues.

<unk>.

I think that pretty well covers it.

We appreciate you being that Raul and I will be around for the next two hours three hours and we will pick up questions and try to clarify things that you may have thank you for joining us. Thank you for your interest in the company and all best wishes signing off now from Salt Lake City.

Good night.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

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Good afternoon, ladies and gentlemen, and welcome to the fourth quarter and fiscal year 2021 earnings Conference call for Merit Medical Systems, Inc.

At this time, all participants have been placed in a listen only mode.

Note that this conference call is being recorded and the recording will be available on the company's website for replay shortly.

I would now like to turn the call over to Mr. Fred <unk> properly.

Medical Systems' founder Chairman and Chief Executive Officer. Please go ahead Sir.

Thank you and welcome everyone to Merit Medical's fourth quarter and fiscal year 'twenty, One earnings conference call.

I'm joined today on the call by Raul Parra, our Chief Financial Officer, and Treasurer, and Brian Lloyd, Our Chief legal officer and corporate Secretary.

Ryan would you please take us through the Safe Harbor statements. Thanks, Fred before.

Before we start I would like to remind everyone that this presentation contains forward looking statements that receive safe Harbor protection under federal Securities laws.

Although we believe these forward looking statements are based upon reasonable assumptions they are subject to unknown risks and uncertainties.

Realization of any of these risks or uncertainties.

As well as extraordinary events or transactions impacting our company could cause actual results to differ materially from those currently anticipated.

In addition, any forward looking statements represent our views as of today February 24 2000.

2022, only and should not be relied upon as representing our views as of any other date.